Commission Based Pay Laws – 4 Key Things to Know

Commission-based pay is workplace compensation based on an employee’s sales productivity. It can be tied to the overall quantity of sales or the value of the things sold.

How your particular commission pay is generally calculated is set out in the commission agreement. State and federal laws regulate commission-based pay.

Four key things to know are:

1. you can be classified as exempt or non-exempt,
2. if you are non-exempt, you are still entitled to the applicable minimum wage,
3. if you are non-exempt, you are still entitled to overtime pay, and
4. if you are exempt, you may be entitled to a minimum salary.

1. Both exempt and non-exempt workers can be paid commission

Both exempt and non-exempt employees can receive commission pay. One of the most important things to know about commission-based pay laws is that they affect each classification differently.

Non-exempt employees are entitled to certain workplace protection such as:

• a minimum wage,
• overtime pay, and
• rest and meal breaks.

Exempt employees are exempted from these legal requirements under state and federal employment laws.

Employees are non-exempt unless they fall within certain categories that make them exempt. Under the federal Fair Labor Standards Act (FLSA), some of the most prominent examples of exemptions are:

• the white collar exemption, which covers:
  • executive employees,
  • administrative employees, and
  • professional employees;
• computer professionals, and
• outside sales employees.¹

Some states have laws that slightly alter the categories of exemptions. Under California law, for example, doctors, surgeons, and private school teachers are also exempt.²

Whether you are exempt or not can affect your commission-based pay.

2. You are still entitled to a minimum wage if you are non-exempt

If you are not exempt from wage and hour laws, you must make at least the federal minimum wage of $7.25 per hour. If your state minimum wage laws require a higher hourly rate, such as in California, you are entitled to that higher hourly rate.

This means that, if your commission pay would be lower than the applicable minimum wage, you must be paid the minimum wage.

3. You are also entitled to overtime pay if you are non-exempt

If you are non-exempt, you must also receive overtime pay for eligible hours. Under federal law, this means that you are entitled to receive 1.5, or one-and-a-half times your regular rate of pay for hours worked in excess of 40 in a workweek.³

Some state labor laws, like California, are more generous to workers.⁴

This increases the rate of your base pay, but not your commission amounts.

For example: Ralph is a full-time non-exempt car salesman. He gets paid a base rate of $8 per hour. He also makes commissions based on what he sells. One week, he works 45 hours. The first 40 of those are paid at $8/hr, while the last 5 are paid at $12/hr. He will earn $380 for the week. His commission pay will not be affected by the overtime hours.

4. Depending on your exemption, you may be entitled to a minimum salary

The categories of exempt employees are based on the type of job duties that they perform. Most categories, however, also require the employee to make at least a minimum salary in order to be exempt.

Under federal law and regulations promulgated by the U.S. Department of Labor, workers have to make at least $844 per week in 2024 in order to be classified as an exempt employee.⁵ Some states have higher minimums. In California, for example, employees have to make at least $66,560 in 2024 to be considered exempt under the white-collar exemption.

If you are paid on commission and are exempted from wage and hour laws in a category that has a minimum salary, you must be paid at least your minimum salary.

However, not all exemption categories have a minimum salary.

Outside sales employees are one category of exempt employee. You can be classified as exempt for being an outside sales employee if:

• your primary duty on the job is to make sales or obtain orders or contracts for goods or services, and
• you are customarily and regularly engaged away from your employer’s place of business.⁶

Note that there is no requirement that outside sales employees make a minimum salary. Because they are exempt, they are also not entitled to a minimum hourly wage.⁷

Can commissioned employees receive commission-only pay?

Yes, but only if you are an exempt employee and are not entitled to a minimum salary. Generally, this means that you are an outside salesperson.

What kinds of commission-based pay are there?

You are paid on a commission basis if you receive a share of the sale that you consummated. That share can be based on:

• the number of sales you made, or
• the value of the sales that you made.

The details are laid out in the commission agreement. This written agreement is often a part of the employment contract. It covers:

• the employee’s duties with regard to selling the products or services,
• where the employee is expected to make those sales,
• how commissions are calculated,
• when commissions are actually earned,
• whether the commissions are paid at the point of sale or a later time, and
• if, or how, commissions can be lost.

Many commission-based payment plans are not commission-only pay structures. Many of them are a mixture of the payment of commissions and:

• a base hourly pay rate, or
• a yearly salary basis.

What happens to my commission payments if I am terminated?

If you are terminated or leave your job, you are entitled to all of the commission pay that you have earned. All earned commissions must be paid in the next pay period or payday, or in your last paycheck. When commission becomes earned is detailed in the commission agreement. The commission agreement, however, may include a forfeiture provision. Forfeiture provisions state that only current employees can receive commission pay. If there is a forfeiture provision in your commission agreement and you get terminated, you lose your pending commission payments.

If you think that your prior employer owes you sales commissions, you should strongly consider getting the legal advice of an employment attorney from a reputable law firm. An employment lawyer can help you file a wage claim and recover the unpaid commissions that you are owed.

---